Asia faces $134bn insurance gap

Recent earthquakes affecting the Indonesian islands of Lombok and Sulawesi highlight the devastating humanitarian impacts of natural catastrophes, which Asia is vulnerable to due to its geographic profile. According to Indonesia’s National Disaster Management Agency (the BNPB), the four quakes during July and August killed more than 510 people, injured at least 7,100 others, and displaced more than 431,000 people with 88,740 houses and 798 public and social facilities destroyed or damaged.

Lloyd’s latest underinsurance report finds that there is a global insurance gap of US$163bn, with the majority of this gap ($134bn) in Asia where it has grown by 9.4% since 2012. Bangladesh, India, Vietnam, the Philippines and Indonesia all have insurance penetration rates (total insurance premiums as a percentage of GDP) of less than 1%. The country with the highest expected annual loss from natural disasters, Bangladesh, also has the largest insurance gap relative to GDP (2.1%) or the equivalent of $6bn, while Indonesia has a 1.4% insurance gap relative to GDP or the equivalent of $15bn.

This means that much of the costs of recovery from major natural catastrophes falls to governments, charities and the private sector. The lack of risk transfer to the insurance sector can lead to difficulties in recovering economically from disasters. While there have been efforts to enhance Asia’s ability to withstand natural and manmade events, its geographic profile will mean that both the economic support and risk advice provided through the insurance process will continue to be important to the regions long-term prosperity.

Managing the risks faced by Asia is important to global growth. The International Monetary Fund’s (IMF) latest World Economic Outlook, shows that Asia accounts for more than 60% of the global growth, driven by Asia’s city dwellers, who make up 54% of the global urban population. However, urbanisation is also leading to an accumulation and concentration of risks, increasing both the need for and benefits of designing and planning for more resilient infrastructure to protect the region’s economic growth.

The Lloyd’s City Risk Index (CRI) found that the 92 cities surveyed in APAC have an average cumulative $241.3bn GDP@Risk, which is 44% of the global GDP@Risk, from the 19 surveyed threats. Of these 92 cities, 16 are categorised as having very strong levels of resilience, including all Japanese, South Korean and New Zealand cities. However, 19 cities receive the lowest level of very weak resilience, including all Indian and Pakistani cities. If all APAC cities were to achieve the highest resilience rating of very strong, then the GDP@Risk of APAC would decrease by US$34bn. Building resilience is therefore an urgent priority for APAC given the risks it faces, and insurance can play a key part in that process.

To enable communities to implement appropriate risk management and insurance strategies it is important to understand the risks they are facing. Lloyd’s CRI found that natural catastrophes comprise 54% of the GDP@Risk within APAC cities. Tropical windstorms, with $59.1bn of GDP@Risk each year, are the largest threat. This sum is expected to grow as climate change is likely to lead to more frequent and severe events.

The Lloyd’s CRI has also found that across the 92 APAC cities in the study, as much as $16 bn is at risk from flooding. Different cities have looked to address this in different and innovative ways. Bangkok is looking to build resilience to the $330mn of its GDP@Risk from flooding through intelligently-designed public spaces, such as Chulalongkorn University Centenary Park. This 11-acre site has been designed to hold one million gallons of water, which can be stored and released in dryer times.

With ever more complex inter-connected digital economies, cities need to also consider creative ways to tackle the risks posed by man-made threats. In Singapore alone, a market crash is expected to cause US$1.3bn of impact on GDP, whereas cyberattacks are expected to cause $330mn. The Global Smart City Performance Index 2017 study ranks Singapore as the top global city for smart citizens based on its mobility, health and safety technology-driven solutions.

Yet this increased use of digital technology poses a greater threat when incidents occur. The Lloyd’s CRI has found that an extreme cyberattack could lead to $64.4bn of GDP@Risk in Singapore alone. In July 2018, Singapore suffered its worst cyberattack when a government health database was hacked, releasing the personal data of around a quarter of the country’s population, including the country’s Prime Minister Lee Hsien Loong.

The Singapore government, insurance regulator and industry are looking to enhance Singapore’s cyber resilience. At the 15th Singapore International Reinsurance Conference (SIRC) it was announced that the financial service regulator and the Monetary Authority of Singapore (MAS) would be launching the world’s first commercial cyber risk pool providing up to $1bn of capacity. Lloyd’s Singapore Market Presentation highlighted the role Lloyd’s is playing through its involvement with the Cyber Risk Insurance Management Programme.

Understanding and mitigating the risks faced by Asian cities is important to communities, the region and global prosperity, with the Lloyd’s CRI finding that APAC cities face a total of $241.3bn of GDP@Risk annually. Insurance and reinsurance have a key role to play by helping governments, corporates and communities improve resilience to these risks, reducing economic impacts, and speeding up recovery post disaster. Efforts to close Asia’s significant insurance gap, combined with innovative efforts to build more resilient and interconnected cities, will be an enabler for Asia’s continued growth.

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